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This paper investigates the determinants of house prices in a sample of European countries over the period . Focusing on the role of financial liberalization, we find that it has mainly affected the short term dynamics of residential prices. In particular, the impulse effects on house prices of income and mortgage debt have become smaller. On the other hand the effects of interest rates, past house prices and, to a lesser degree, stock market have strengthened. In other words, there seems to have been a certain "de-linking" of short term house price dynamics from income, whereas the housing market may have become more similar to a financial asset market, with interest rates and expectations of capital gains playing a more prominent role.Keywords: house prices, financial liberalization, cointegration, error correction mechanism.JEL Codes: C2, G1, R21.We thank for helpful comments seminar participants at the European Central Bank in Frankfurt and the 63 rd International Atlantic Economic Conference in Madrid. The views expressed in this paper are those of the authors and do not necessarily reflect those of the European Central Bank. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 IntroductionHouse price changes in Europe have been largely attributed in recent years to developments in the financial markets, namely the fall of interest rates and the easing of credit constraints following financial market liberalisation. Consequently, the return to less favourable credit conditions has been feared to trigger a sharp downturn in the housing market in Europe as in the U.S. However, despite widespread conviction of the importance of financial factors on house price dynamics, the empirical evidence is relatively thin and often difficult to interpret, especially when it comes to studies outside the U.S. and the U.K.The earlier cross-or multi-country studies of house price dynamics focused primarily on the interest rate channel (see for example . For the most part, interest rates (or the user cost of capital) were found to have a statistically significant, though quantitatively limited impact on house prices. Other financial variables and, in particular bank credit, have also been introduced in some recent empirical country-specific and cross-country studies, on the grounds that there may be credit rationing. The role of credit was explored early on in country specific models, particularly for the U.K. (see for instance and Meen (1990)) and was also taken up in the more general discussion on the determinants of asset price dynamics. A certain coincidence in recent years between credit cycles and house prices in countries other than just the U.K. has brought the possible relation between the two back into the limelight. Tsatsaronis and Zhu (2004), IMF (2004), Lecat and Mésonnier (2005), Ott (2006) and others have explored the role of ban...

This paper -which takes into consideration overall experience with the Harmonised Index of Consumer Prices (HICP) as well as the improvements made to this measure of inflation since 2003 -finds that the HICP continues to fulfil the prerequisites for the index underlying the ECB's definition of price stability. Nonetheless, there is scope for enhancing the HICP, especially by including owneroccupied housing (OOH) using the net acquisitions approach. Filling this longstanding gap is of utmost importance to increase the coverage and cross-country comparability of the HICP. In addition to integrating OOH into the HICP, further improvements would be welcome in harmonisation, especially regarding the treatment of product replacement and quality adjustment. Such measures may also help reduce the measurement bias that still exists in the HICP. Overall, a knowledge gap concerning the exact size of the measurement bias of the HICP remains, which calls for further research. More generally, the paper also finds that auxiliary inflation measures can play an important role in the ECB's economic and monetary analyses. This applies not only to analytical series including OOH, but also to measures of underlying inflation or a cost of living index.